Gold has been under assault since its failure to break and close above the $1800 per ounce level earlier this month. A reversal occurred on October 5 possibly precipitated by a decrease in the unemployment rate to below 8 percent, which increased talk that further stimulus efforts in the coming months may not be needed.
EARNING DISAPOINT
What a difference a few weeks make, with earnings data continuing to disappoint along with the ongoing drama of the Euro crisis still dominating headlines. Recent economic data in the U.S., like jobless claims, has shown that maybe the sudden euphoria over last month’s jobs data was overblown, and that sustainable job creation, especially in the private sector, is largely a myth.
FISCAL CLIFF LOOMS
Oh and if you haven’t noticed, we have a Presidential election in two weeks yet to be decided and then after the Fiscal Cliff to be debated and, in my opinion, probably kicked down the road into 2013. In my view, the Fed is well aware of all these events and will not take their foot off the pedal as far as monetary stimulus is concerned. Weak earnings results have belabored the point here and unfortunately for some companies and their employees, more impending layoffs may be coming.
As it is with trading, how can one take advantage of the current fiscal situation brought on by our government? I believe we could see the Fed expand their balance sheet even more to increase the amount of stimulus due to all the uncertainties the country and the global economy face. We can argue how sound these stimulus efforts are at a later date; nevertheless, this is the environment we are in. It’s important to take note that to determine where a market may go, you must first understand where it’s been.
BUY THE DIP
Gold broke out of its range in Mid-August from the 1620 level and traded up to just below 1800 by early October. A fifty percent Fibonacci retracement brings us down to the 1709-1710 level, which is where we settled yesterday. A sixty-two percent retracement brings us down to the 1688-1690 level, and if that level is achieved, I believe a long position for Gold on a call spread basis using February options could be the way to go.
I am looking at buying on a dip, if Gold can get down to the 1690 area, the Feb Gold 1775 call and selling the 1800 call spread against it. I anticipate the cost at around 500 dollars for the spread, which is the risk for the trade plus commissions. The max you may be able make or collect is 2,500.00. I have other more conservative strategies as well for Gold, but given the current state of the global economy, I believe investors will be looking for safe havens to park their money, possibly using gold as one of the vehicles.
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